3 different ways to think about an ISA
Not everyone sees things the same way – and that is true when it comes to a Stocks and Shares ISA too. But mindset is important in investing.
How we think about things and what we do as a result can make the difference between building wealth and losing it.
Here are three different ways I have heard people speak about an ISA. I far prefer one of the three and will explain why.
Putting money away with no expectations
Some people put a bit of money away into a Stocks and Shares ISA then use it to make the occasional investment in companies they may not even understand but hope can give them an amazing return. Part of the thought process here can be that it does not matter if lots of the shares do nothing, as long as one performs brilliantly.
Sometimes that might work – if I had invested in Ashtead (LSE: AHT) 15 years ago, I would now be sitting on a return of over 7,000% from share price gain alone, even before considering dividend income.
But this approach seems to me like speculation not investment. If I put my hard-earned money into an ISA, I prefer method two. That is, I want to invest in companies I understand and have a basis for my choice.
Hoping to match the market
In fairness, that is how a lot of people think. They do not want to throw money at a bunch of random companies and essentially see if they get lucky.
But the stock market can be a confusing place. It takes time to analyse companies and many people have more pressing claims on their time.
So some investors simply hope they can invest in an ISA with a performance that matches the market. A common approach (method three) is therefore to buy an index tracker that mirrors the performance of a common market index like the FTSE 100.
I do see that as investment, not speculation. One concern I would have is choosing a tracker that minimised how much I had to pay in fees.
Looking to build serious wealth
Still, as a long-term investor the approach does not excite me much. Why? Basically, I think it is a missed opportunity. I mean even over the past five years, the Ashtead share price has gone up 124%.
During that period the FTSE100 is up just 12% (and the FTSE 250 by a meagre 2%). In other words, price gains on the index would not even have kept my ISA value the same in real terms after inflation.
Dividends would have helped. But method two, using my ISA to buy carefully chosen shares could have helped me build more wealth than a tracker.
Ashtead’s previously low price reflected risks, such as a recession-triggered downturn in construction leading to lower demand for rental equipment. That risk is rearing its head again now, in my view.
But it has the elements of a great business, as it did 15 years ago. Market demand is high, customers have deep budgets for equipment they need and there is limited competition.
Valuation matters. The uncertain economic outlook and possible impact on construction puts me off adding Ashtead to my ISA right now. So I’m looking for other great shares at attractive prices to add to my ISA.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024